Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter (Q3) and Nine Months ended 30 September 2010
Issuance Date: 21 October 2010
GSK reported Q3 2010 results characterized by a strategic shift toward diversified growth areas (Vaccines, Respiratory, Emerging Markets) while managing significant headwinds from generic competition, US healthcare reform, and regulatory actions regarding the diabetes drug Avandia.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|---|
| Turnover (£m) | 6,813 | 6,758 | 21,195 | 20,274 |
| Operating Profit (£m) (Before Major Restructuring) |
2,129 | 2,223 | 5,165 | 6,580 |
| Operating Profit (£m) (Total Results) |
1,958 | 2,071 | 4,103 | 5,978 |
| Profit After Tax (£m) (Attributable to Shareholders) |
1,288 | 1,335 | 2,324 | 3,901 |
| Earnings Per Share (p) (Before Major Restructuring) |
28.2p | 28.5p | 61.5p | 85.8p |
| Earnings Per Share (p) (Total Results) |
25.3p | 26.3p | 45.7p | 77.0p |
| Net Cash Inflow from Operations (£m) | N/A | N/A | 5,332 | 5,580 |
| Net Debt (£m) (As of 30 Sep 2010) |
8,792 | 10,180 | 8,792 | 9,444 |
Note: Q3 EPS and Operating Profit figures are presented in pence and millions of pounds respectively. Net Debt decreased by £652 million during the nine-month period.
Material Changes vs. Prior Period
- Revenue Decline: Q3 Group turnover declined 2% (CER) to £6.8 billion. Excluding pandemic products and Avandia, sales grew 2%. The 9-month turnover grew 4% to £21.2 billion.
- Regional Performance:
- USA: Pharmaceutical sales declined 8% (Q3) and 7% (9 months) due to generic competition (Valtrex), Avandia restrictions, and healthcare reform.
- Europe: Pharmaceutical sales declined 9% (Q3) but grew 3% (9 months), impacted by price reductions and Avandia.
- Emerging Markets: Strong growth of 14% (Q3) and 24% (9 months), driven by Vaccines and Dermatology.
- Product Movements:
- Avandia: Sales declined 65% in Q3 to £70 million following EMA suspension and FDA restrictions. A £147 million charge was recorded in Q3 (including £65m for sales returns).
- Vaccines: Sales grew 19% in Q3 and 51% in 9 months, driven by Synflorix, Cervarix, and pandemic H1N1 vaccines.
- Valtrex: Sales declined 75% in Q3 due to generic competition.
- Legal Costs: Significant legal charges of £1,836 million were incurred in the first nine months of 2010, primarily related to settlements, compared to £199 million in the same period of 2009.
Guidance, Outlook, and Risks
- Full Year Guidance:
- Operating Profit Margin: Expected to be in the range of 32% to 32.5% (excluding legal costs).
- Other Operating Income: Lowered to around £500 million for 2010 (previously £800-£900 million) following an assessment of asset disposal opportunities.
- Tax Rate: Adjusted to around 29% for the full year (previously lower) following the resolution of historical tax matters.
- Cost Management: GSK remains on track to deliver £2.2 billion of annual restructuring savings by 2012. R&D cost savings are expected to be realized earlier than anticipated.
- Dividends: Third interim dividend declared at 16 pence per share (up 7% from Q3 2009).
- Risks and Contingencies:
- Avandia Litigation: Pending litigation in US federal and state courts; new cases continue to be filed. GSK is assessing merits and potential provisions.
- Regulatory Investigations: Ongoing cooperation with US DOJ and SEC regarding sales/marketing practices for HIV products and potential Foreign Corrupt Practices Act issues.
- Legal Provisions: Aggregate provision for legal and other disputes stands at £2.5 billion as of 30 September 2010.
Investor Verification Checklist
- Avandia Exposure: Verify the trajectory of Avandia sales and the adequacy of the £147 million Q3 charge given ongoing litigation and regulatory restrictions.
- Legal Settlements: Confirm the status of the £1,836 million legal costs incurred in the first nine months and potential for future liabilities.
- Asset Disposal Strategy: Assess the impact of the lowered "Other operating income" guidance (£500m) on full-year profitability, as GSK does not foresee further significant disposals.
- Generic Competition: Monitor the impact of generic entry on key products like Valtrex and Boniva on US margins.
- Restructuring Savings: Validate the timeline for realizing the £2.2 billion in annual cost savings by 2012.